ETLA Discussion Papers, The Research Institute of the Finnish Economy (ETLA) 728

Abstract:

This paper provides a theoretical framework to study the behavioral and welfare effects of forest conservation, which leads to a binding harvesting constraint for landowners. The economy is modeled as a three-stage game by the interaction of the government’s conservation policy, with consequent adjustments in domestic timber market, and in output determination in a Cournot rivalry with the foreign forest industry. More specifically, we study how forest industry’s competitiveness constrains forest conservation and whether the “green image” demand resulting from forest conservation compensates the loss in competitiveness. It is shown that although the green image effect may locally be strong enough to even increase the profits of domestic forest industry, at the socially optimal forest conservation level it never dominates the competitiveness effect. Hence, there is a trade-off between forest conservation and the competitiveness. These findings are robust to the issue of whether timber markets are perfectly or imperfectly competitive. – biodiversity ; harvesting constraint ; timber price bargaining